We likely will be into the next presidency before economists conclude the efficacy of this administration’s stimulus efforts. Also yet unknown is the full impact of banking and credit reform efforts on economic recovery and unemployment on the macroscale. >
March 2011- We likely will be into the next presidency before economists conclude the efficacy of this administration’s stimulus efforts. Also yet unknown is the full impact of banking and credit reform efforts on economic recovery and unemployment on the macroscale. On the other hand, the recent tax incentive seems to offer real impact now for American manufacturers and their machine tool providers.
In 2009 and later extended into 2010, Section 179 allowed companies to deduct (up to $250,000) a portion of their capital equipment and applicable computer software purchases against their gross income. On the surface, these reforms seemed like a reasonable incentive to purchase equipment and machine tools for use in the forming and fabricating industry. In reality, the impact was limited.
It was only a tax benefit if a company was going to make a profit for the year. With the expeditious rate of market contraction at the end of 2008 and companies scrambling to “right size” for that new business level, profitability was a very vague target. While manufacturers dealt with negative cash-flow, overpriced raw material inventory and the threat of called loans, limited financing options were available. In reality, the opportunity to purchase equipment was available to only the most well-positioned, fiscally conservative businesses. For the few that could afford to invest in equipment, the spending limits ($1.05 million maximum) were such that major investments for small- and medium-size businesses received little benefit.
For the New Year, not only have expense limits and spending caps increased, but there are additional features that could prove the tax reforms substantially more worthwhile for manufacturers looking to invest than in previous years. In 2011, the deduction is eligible for the first $500,000 spent, doubling the previous levels. Also, the capital equipment value was raised to $2 million. Alone, these increased rates are enough to make headlines, but they may not be a game changer.
How it affects businesses
The incentives were available for new and used equipment. To spur the new equipment sector, Congress added 100 percent bonus depreciation on capital spending above the $500,000 mark, applicable to new equipment only. In the past, an argument against the tax advantage of bonus depreciation was that manufacturers liked the steady, multiyear devaluation of capital purchases, allowing for longer-term financial planning. They perceived giving up so much tax-wise in the first year in service as undesirable. But those arguments were based on ideas rooted in more predictable business conditions that have less application in todays’ dynamic environment.
Your accountant will need to look at how this best applies for your business. In general, the Section 179 deduction is taken first then the bonus depreciation. For many small- and medium-size manufacturers, it may be a challenge to have $500,000 profit this year to take full advantage of Section 179. That’s where the last element is probably the feature that makes it all work and where it had been less effective in the past.
If your business will not show a profit in 2011, then applying the 100 percent bonus depreciation would cause a net operating loss. With this, losses can be carried back two years to recover income taxes paid in 2009 and 2010. With the economic challenges we faced the last few years, a lot of manufacturers may not have paid significant income taxes to get back. On the other hand, the net operating loss can be carried forward 20 years if necessary.
Why could 2011 bonus depreciation combined with the elevated Section 179 deduction spur investment in capital equipment? Two reasons: timing and execution.
As we are further removed from the tumultuous periods of the recession, manufacturers that are settled into the new business level and employing a multitasking workforce are better positioned to plan strategically and make the leap of faith for capital expenditures. These same possibilities could have been available two years ago, but who would have used them? We were all too busy trying to figure out which end was up. With the proper timing, taking advantage of the Section 179 deduction provides a tax advantage now when companies know it is useful. Depending on profitability in 2011, it could provide some tax benefit in the future as well. FFJ
Jack Pennuto Jr. is the sales manager at Formtek Metal Forming Inc., Warrensville Heights, Ohio. He's worked in the sheet metalforming industry as a researcher, tooling designer and project manager.
Interested in purchasing reprints of this article?
